Increasing rent and mortgage costs lead to record 2017 housing cost burden

Over the last few years the cost to either rent and/or buy a home has been increasing at a rapid rate. This has lead to at least 33% of Americans being what is known as “cost burdened”. But the news is even worse than that, as that latest data is from 2015. As we progress throughout calendar 2017, that percentage is bound to be even much worse.

It is generally considered “safe” to spend no more than 30% of total, after tax income towards housing costs. This includes all applicable expenses, whether it is rent, a home loan, property taxes, utility bills, insurance, etc. No matter whether someone leases or owns, it is always recommended that total expenses paid to a lender, bank, landlord, or utility company should not exceed that 30% threshold. Now about a third of households are exceeding those guidelines per a study from Harvard’s Joint Center for Housing, and many are seeking assistance for their housing costs.

The primary cause of this problem is that both the cost of rent and buy have been rapidly increasing over the last few years due to basic supply and demand. The demand is high, and there are not enough new homes or apartments are being built to keep up. Just looking at average costs to lease a home, since 2015 average lease rates have been increasing anywhere from 2-4% per the Apartment List National Rent Report. While it may not seem like a huge number, this is faster than household incomes and you also need to compound that number.

The cost to buy a home is much worse. While mortgage rates have stayed low, average prices to buy have been rapidly increasing. Per zillow, from February 2014 to February 2017, average selling prices for a home have gone up almost 20%! That is way faster than inflation as well as families incomes.

Maybe the ironic part is that this rapid inflation in buying a property is pricing many people out of the home-purchasing market. So they then go lease an apartment instead, which then puts more demand on rental prices due to the laws of supply and demand.

What does the future hold for the housing cost burden problem?

It is putting families into a very difficult situation. A big problem is that housing starts in the US have been flat to trending down in 2017 per the census bureau. If there is a shortage of homes and apartments being built, this will not help the supply grow. Then, with demand still high and supply tight, prices will continue to increase, both for leasing and buying. So things are not looking to great right now.

There may be a few other barriers in 2017 as well. One is the federal reserve continues to increase short term interest rates, and they will be starting to unwind the stimulus programs in place by not re-investing into buying mortgage or treasury bonds. While of course no one knows how this will all play out, in theory if the federal reserve starts to wind down their bond stimulus programs this will put upwards pressure on long term mortgage rates and payments. The increases in prime rates will likely impact short term and/or ARM mortgage rates. That will make home-buying more challenging for buyers.

Home builders also say it is very hard to find workers to build homes or apartments. Many have been using immigrants as Americans either do not want that type of work or they lack the skills. But now some immigrants are starting to leave those roles due to more aggressive deportation policies put into place by the government. So that lack of workers will also lead to slowing housing starts.

So there is no telling how this will all play out for 33% of Americans, and quite frankly others who are near being cost burdened. If you are a young person looking to rent your first home or buy in 2017, maybe live at home a little longer to build more savings. If you are older and struggling, then as we always say the job market is booming right now. Get the skills you need to increase your income so you can afford a home.